Kickstarter Category

I recently read this piece by Forbes:

http://www.forbes.com/sites/cameronkeng/2013/04/17/warning-kickstarters-policies-cause-irs-tax-audits/

The author dissects Kickstarter’s new tax guide:

http://www.kickstarter.com/help/taxes – Its seems that Kickstarter has since reduced their content to the point of worthlessness, I am assuming to avoid the legal tidal wave of audits from their poor advise.

For prosperity, I will post a link to my article again here,

http://www.guenthertax.com/blog/2012/05/no-kickstarter-project-should-pay-income-tax-in-their-first-year/ (originally posted back in May 2012)

Apparently my article being No. 6 on Google’s search rank for “Kickstarter taxes” was not enough to warrant an inquiry from either party

For shits, I will post a breakdown of how I feel about the Forbes article in question. I am not sure who will benefit from this, maybe other CPAs, but maybe it will clarify it a little more:

1) Kickstarter Campaigns are not businesses

The author of the Forbes article states that Kickstarter Campaigns may not be classified as a business, or at least he alludes to that fact that one out of the many IRS rules on the classification of business may actually make the company a “hobby”. A hobby does not have a simple definition, but the IRS asks: “Does the time and effort put into the activity indicate an intention to make a profit?”

The point that the author made is that most people will need a profit for 3 of the 5 years to be classified as a business. He uses a quote from the IRS website of a way that they determine whether a business is actually a hobby. The quote is meant for that exactly, to determine if a business is actually a hobby, NOT the other way around.

For this reason and more below, I disagree with the author and here is why:

This is a gray area in the IRS code, this is where I tell my clients that the IRS will act based on substance over the form. This means that the IRS will look at the whole picture before determining that the Kickstarter campaign is a trade business or a hobby. Many businesses are opened for one year and then closed down, you dont see the IRS auditing every one of those businesses and saying that they are all hobbies. This is where that substance kicks in, was there any intention of making a profit?

From the IRS:

The term trade or business generally includes any activity carried on for the production of income from selling goods or performing services

I believe that 99% of all Kickstarters intend to make a profit by selling good or performing services, and the IRS will recognize this.

2) Accrual Method

The author mainly gets this right, and it looks like Kickstarter agrees because they removed it from their guide. I do believe that he left out important facts that may benefit people. He left out the information touched in my article, that advanced payments can be classified by electing to do so, and can be postponed until the following year.

He also did not explain GAAP, accrual and tax basis very well. Most people who file a business return as a sole proprietor will never see the “reconciliation” (schedule M1, M2, M3) or GAAP election that is on a partnership or corporate return, yet they are still able to file under the accrual method.

3) Gifts

“A gift is the transfer of property by one individual to another while receiving nothing, or less than full value, in return.”

After writing the first draft of this article, I now realize that this is a pretty big gray area. The code is so simplified that simply stating that a gift is a “detached and disinterested generosity” is WAY to simple to be used as concrete tax advice.

My thoughts on this is that if you can convince the IRS that the backer of a project gives the money to you with NO intentions of getting anything in return and will never use or see the project that you are creating, then it may be a gift. If it falls into any other category, then it is income.

Again, following the concept of “substance over form”, the IRS states in a court case Commissioner v. Duberstein that when determining whether something is a gift for taxation purposes, the critical consideration is the transferor’s intention. This is a question of fact that must be determined on a “case-by-case basis”. This alone allows the IRS to determine the intentions of the gift giver just by evaluating the substance of gift itself, and what the gift giver expects in return of the gift.

I believe that when the IRS sees the intention of someone running a Kickstarter, advertising for money in order to further a personal goal, that will be viewed in substance by the IRS as a generosity that is not detached, and with a potential to be turned into a business. The end result of the project itself is also grounds that the gift giver will get something in return for the gift thereby breaking the IRS rules of classifying it as a gift.

Wow, this one is terrible, I am not sure which smarty came up with this at Kickstarter Legal, you are surely to be busted for this one. In this case the author of the Forbes article gets it mostly right, and I applaud him for being blunt about it.

In conclusion, there may be a project or two that will fall under a category of a gift out of many, but that will be few and far between. I would play the safe card in this instance, and not try and be the first to challenge the IRS. Besides, there are better ways to reduce taxes.

Conclusion

The author gets it right to challenge Kickstarters view of taxation, but he missed a few key concepts that hopefully were explained in more detail above.

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What kind of projects will Kickstarter Accept?

I have seen Kickstarter reject 1 project out of 26 personally, though I have heard many more people complain about a rejection. It may be more common under certain categories since I mainly work with Video Game Devs and Tech companies, I may not see it as often.

The Basics

First and foremost you must follow their guidelines. Kickstarter has done a fairly good job of detailing their guidelines in their help sections.

http://www.kickstarter.com/help/guidelines

also review this:

http://www.kickstarter.com/blog/kickstarter-is-not-a-store

The majority of the time, when your project follows those guidelines, you should not have any issues. Double check your project before submission and you may save yourself some hassle in the future.

When “The Basics” Fail

If your project is rejected, but the rejection does not fall into a specific factual area of the guidelines, you may be a part of the Kickstarter “Black Hole”. Here are a few (out of many) people who’s projects were rejected without merit:

http://www.highprogrammer.com/alan/rants/kickstarter.html

http://www.linkedin.com/groups/Hello-I-have-posted-project-4325381.S.113149709

Although the list goes on, you get the idea. It seems that Kickstarter editors can freely reject projects based on their opinions and/or loosely tied to the project guidelines. Mainly their excuses are that the projects do not fit in with the “theme” of Kickstarter. Flexing a little power maybe? Who knows their reasoning, but it is obviously geared toward their brand and how they want the public to view that brand.

Of the projects that I have seen rejected, there really was not a basis in their guidelines, they simply told the creators this:

They do not want to be seen as a “Home shopping network”

or

“Its not in the style of Kickstarter, please review other projects in those categories and it will give you an idea of what we are looking for”

The project that was flat out rejected on my time, was a piece of technology that was available everywhere, but it was combined with clothing to make it more accessible. Kickstarter classified it as a “QVC” type item.  My client ended up launching on IndieGoGo:

http://www.indiegogo.com/projects/cynaps-get-yours-now-at-www-maxvirtual-com

It funded at $40,000 with 611 backers. Though that may have been less than what Kickstarter may have produced, it really confused me as to why they would reject this successful project.

You may be asking “what the heck can I do!?”

Since that rejection, I have learned a few things:

I would try to add elements to your campaign that Kickstarter likes to see: DIY elements, Nostalgia projects,  also it helps to be a famous celebrity (haha), or get a celebrity to back your project. I have never seen a project get rejected that was run by, or backed by a celebrity.

If those don’t work, The best way to proceed in my opinion, is to create a new login for Kickstarter, completely rewrite your project the absolute best that you can based on their guidelines, change the title and resubmit it hoping that it goes to a different editor. They currently have 37 editors, of all of the editors, I would guess that one of them would be a bit more lenient. This way there is a 95% chance you will get a different editor. Make sure you take the time to review the guidelines and eliminate anything from the project that may seem like it won’t pass.

Truthfully, I don’t think that this practice from Kickstarter is as prevalent now than it was in the past. Kickstarter is in the media’s eye now more than ever and if any potentially high profile that gets rejected, it would definitely create some controversy for them.

Best of Luck!!

 

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27 ,
December

Kickstarter and State Sales Tax

Unfortunately there is no easy answer here, every state is different as far as their requirements. Hopefully I can clarify a lot of misconceptions though:

Sales tax has been around for many many years. It was originally designed to tax retail stores for locally sold products. Originally it was a simple system because everyone would buy from their local store.

Interstate sales started occurring more regular with mail order, then it exploded when eCommerce started making its mark.

Since that time states STILL do not have a solution for interstate commerce, which means sales made to someone who lives outside of the state where you live is not subject to paying sales tax on their purchase.

With that historical background out of the way, the simplest answer I could give is that most likely your state only requires sales tax to be paid if you ship a kickstarter reward to someone WITHIN your state. With that being said, your state may have specific rules that may need to be followed, that’s why it is important to talk to a professional who can look up those rules for you.

Here in California, you are only required to pay sales tax on products shipped inside the state. In addition to that, there is also a district tax for specific areas within California. For Example, if you live in Sacramento, and you ship a kickstarter reward inside Sacramento, then you will have to pay a district tax on that item as well as the state sales tax.

The absolute best way that you can approach this is to incorporate your business in a state that does not have sales tax, such as Delaware,  then distribute (ship) your kickstarter rewards and products from a state that ALSO does not have sales tax. This way you can typically avoid that altogether. This would only be necessary if you feel a lot of your backers will happen from the state that you live in.

Typically, if you do conduct a successful kickstarter, and you do ship products inside a state that has sales tax laws, you must pay sales tax on those items. The same goes with intangibles, such as video game sales.

Again, these rules vary state by state, so you may need to consult a professional.

Again, this article is only meant as informational, many individuals and companies have unique situations, I recommend you consult a professional before applying any of the above information.

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I have watched quite a few companies, including a few of my own launch and succeed, or launch and fail. I believe I have learned a fair amount from each, and I hope to pass that onto others.

I have read the Kickstarter Bible and a few other articles and feel that they miss some of the main points. I hope to clarify a lot of what has been said already.

Although this is geared toward Video Game Developers, it can be applied to any type of Kickstarter, and product launches in general.

The Power of the Launch:

One of the biggest mistakes I see with Kickstarter Projects is the assumption that everyone will immediately know about their fantastic idea, that media companies are simply trolling Kickstarter to promote every good idea they see. This is a fatal flaw for most projects. What they need to understand is that the media and potential backers find out by word of mouth, hype, articles, and direct contact. The days of hype surrounding Kickstarter have gone to the dodo, too many projects are being launched now for that to occur. Hard work is now necessary to make a successful campaign.

Another common misunderstanding is the way momentum works in the Kickstarter world. Momentum, to me,  is defined as the pace of backers contributing in order to reach your goal. Momentum is what drives backers. Casual backers that are just scanning through Kickstarter, or who click on a link from a news site, simply will not back a project that does not have significant momentum or excitement. Creating a powerful momentum on the inception of the project is very important in capturing casual backers. There is a reason people flock to a Kickstarter project once full funding has been received, papers have been written about this behaviour. When the goal is reached, backers now know that it is a sure thing and that there is very little risk to them.

There is also what I call the X factor. That X factor is directly related to having a really kickass project, word of mouth drives these projects, and they deserve their own post, I could probably write 1000 words on them. The best way for you to view this X factor is to assume your project does NOT have it, and proceed as if you will not have that added benefit. Hard work will be required for you to reach backers. The world where Kickstarter provides easy money is not around anymore.

One other important item I need to point out is the value of your current fan base. If you have made a game previously, you most definitely have fans that want to see your next project come to fruition. Tap into this if you can.

Friends, Family, Peers are very very important

This one is simple. Tell your friends and family to back your project, tell them to tell their friends, recruit them as your initial drive to establish backers. This will help build that initial momentum. Create an early bird backer category where they get a few extra rewards for helping right away. People get busy, so remind them a few times, this is important to you and they should recognize this. Be honest and sincere in telling them that their backing matters a lot, anything they can do, even $1 will help. Potential backers will respond if they see immediately that 20 people are already backing the project.

Provide the right kind of details on launch:

People want the details! For video games, people want to hear plans for story, music, graphics, engine, characters, features, etc. Talk about that stuff, if possible put it into a video with examples of previous work. A walkthrough of an alpha build has worked on many occasions, where the developer gave comments on what new features will be added.

Explain to potential backers how your project will be different then all of the other projects that are listed on Kickstarter. Although there is nothing wrong with 15 shooters, people will pick the best one with the most credentials, they will also pick the one that offers something that they cant get from the video game store.

Make sure to discuss your previous work! I have noticed that most video game projects do not gain traction because they are unproven. Make it a point to discuss your previous successes.

Be honest and real, people like that, tell people that this is your dream and that you have been waiting your whole life to do something like this and that if they back, they can share in that reality.

Funny and off the wall videos can make your project viral, but I would recommend being professional and say every essential detail in the video before (or after) being funny.

Write a good press release (or simply an email), then submit it properly

It is important to attract the right media outlets, the only way that you will get their attention is to be UNIQUE, HONEST and SINCERE:

In order to create momentum, it is important to capture your fans as quickly as possible. Writing a press release before or right after the launch of the Kickstarter is extremely important for building momentum. Hitting up media outlets that may contain early adopters and your audience is very important in this regard. A large publication like IGN may not be your best course for this, but RPS or PC gamer, among many others may provide coverage for your niche. Once they pick it up, then you have some clout to bring some exclusive content to the big guys, once you reach funding you are 70% more likely to be featured.

Here is a quote from the article that Ben Kuchera wrote over at Penny Arcade:

“..stick to the sites you read, and only contact the writers you know would be interested in the game. Explain why you want to see the game covered, and why it deserves to be funded. Talk from your own experiences and passion, to the outlets you enjoy reading, and they’re going to listen to you.”

When pitching these media people, concentrate on what you are bringing to the table that is different than everyone else. No media outlet will pick up on it unless there is something unique to your project, give people something to talk about,  emphasize this in your email. Also, when you email these bloggers, include a bit of exclusive information for your project, this will make it seem less like a pitch and provide them with something that their competitor may not bring to the table. Be honest and sincere with them, they receive enough email spam from people wanting something from them to last them a lifetime. If you come out the gate offering something to them, you are one step ahead.

Concentrate on why your project is and should be interesting to their specific audience.

In Summary:

Do

  • Talk about what the game will have and how it is unique
  • Tell people about your successes in the past
  • Tell people about why you will be able to succeed on this project, but that the uncertainty of the project is the need to reach your goal of funding.
  • Include a FAQ of information relating to the game, project, things you discuss in the video.
  • Tell your family, friends and peers that this project is important to you and that even if they do not contribute, that maybe their friends on twitter or facebook might.
  • Update your backers with information and answers to questions, implore them to support you by sharing with their friends.

Do Not:

  • Tell us your life story
  • Say “maybe if we get enough funding we will” – be direct, the project will have this if successful.
  • Make it about the money, this  should be about your life’s dream. Your dreams motivate people.

 

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How can a foreign person, not living in (or near) the united states, start and run a Kickstarter Campaign? Here are the basics of how it can be done:

There are many requirements to start a Kickstarter Campaign. Two big ones are to have a US Entity (LLC or Corp) or Social Security number, a US resident, and a US bank account. These two requirements alone would deter quite a few foreigners from trying, you would need someone you knew and trusted in the US to handle that for you. Even then, that person could face tax consequences for running that bank account for you if it is not properly planned (I will cover this in a later post). This leaves very few options to set one up.

A Difficult Solution:

1. First things first, I had to start a corporation so that the foreigner(s) would be the sole shareholder(s): A Delaware Corp is a great idea, they are cheap, provide excellent legal protection, and have a small Franchise Fee for share holders (Typically $225). I can set these up for $550 with a 48 hour rush ($500 without), highly recommended for time constraints of setting up Amazon Payments. I highly recommend you DONT use any of the silly websites that charge you to set up the corporation, they typically charge a mark-up and sometimes yearly fee, most of them do not allow the rush either.

2. Second, I apply for an EIN number – This one is pretty simple and can be done once the Corporation is in place. If you already have a SS# or ITIN you can get an EIN here

3. Next step is to Get a US resident to be part of your team as a “Creator” or “Developer”. This is the tough part. If you are trying to run a Kickstarter campaign, you need to have one. Amazon Payments needs to confirm that your company name listed on the bank account is associated with your US address. Kickstarter also requires this in their own version of verification. The US helper must be available to use their name for Kickstarter. They must be considered a key “creator” in your team. You, as the foreigner can still hold signer privileges on the bank account, but it may be difficult – see below 4. After you get a helper, you need a US based Checking Account To set up a bank account without my help, you need:

  • A tax ID number registered with the IRS. You can get one by filling out and mailing in this form: http://www.irs.gov/pub/irs-pdf/fw7.pdf You will need to provide a physical copy of your passport.
  • Once you get that, find a bank that is located in the US, that has a branch in your country. You must be able to go there in person to set up your signature account. Use your ITIN and EIN number to open the account. Your helper in the US may need to provide documentation supporting this information to a local location. You MUST have a US address on the bank statement, but it can be managed online by you as a foreign person.
  • Some banks such as wells fargo allow a notarized copy of the application and ID to be sent courier as long as your US helper is involved and in person at the bank when the account is set up. Banking laws require bankers to “know” you, which means you must prove to them that you are real and legitimate.
  • I have also heard that some foreign banks, who also have a presence in the US will help you set up a US account without the need for a US helper. I am not sure which banks offer this though.

Or

  • You can have a friend or family member that you trust who lives in the USA (with a SSN) open up a checking account and be an authorized signer on the account for your business.

5. After this process, you may ask: Can I get taxed in the USA for Kickstarter Funds? This is a very complex question, and raises a lot of issues. It is not an easy answer because of the ridiculous complexity of foreign tax laws.

An easy answer, but not easily fully explained, is a small portion of your funds will need to be taxed in the US order to run the Kickstarter Campaign. Your foreign company must “pay” the US company for providing the service to run the Kickstarter Campaign for them, and potentially on any future US sales. I would say a good safe number would be 1-3% of the Kickstarter proceeds for services. They must reflect the market value of the work that it took to complete the whole process. That 1-3% will be taxed in the US at the corporate income tax rate, then whatever is left over can be issued as a payment to your foreign company to produce your game or product, or if you fall under tax treaty guidelines, then it can be a royalty, and taxed in your country appropriately. In every case, a W8-Ben or W8-Ben-e will need to be filled out and kept on file. This is your proof to the IRS that you met those requirements.

Its a difficult process, and with Kickstarter’s tight guidelines, its a risk to do all of that work and find out that your project does not meet those guidelines. Indiegogo, which offer the exact same service allows pretty much anyone to run a campaign.

**This is not meant to be tax advice, and should not be mistaken for it. It is simply analyzing a potential scenario. Your situation is most likely unique and needs a licensed tax professional to look at it.

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